Climate Related Scenario Analysis Strategies for Sustainable Business (S-Lab)

Transcription

1 Climate Related Scenario Analysis Strategies for Sustainable Business (S-Lab)

2 Purpose The intent of this presentation is to give an overview of Scenario Analysis as completed by the MIT Sustainability Lab Team from Spring Agenda Understanding Scenario Analysis Categories of Climate-Related Risks & Opportunities Types of Risks Climate Change Poses to Businesses Case Study: Unilever Preliminary Interview Insights from Colgate Interviews Scenario Analysis Process Scope and Stakeholders Past Industry Trends Future Trends: 2 C Scenario Recommendations For additional details and expansion on this deck please refer to the report provided by the S-Lab team 2

3 S-Lab Team Muhammad Ali Arman Sloan Fellow 2018 Stacey Cox EMBA 2019 Stephen Stabile EMBA 2019 Surya Kant Tiwari MBA

4 Understanding Scenario Analysis CONTINGENCY PLANNING SENSITIVITY ANALYSIS UNCERTAINITY MODELING SCENARIO ANALYSIS Brief Description Alternative actions in response to an exception in the base case projection. Analysis of sensitivity of variance in input variable to strategy outcome. A statistical framework to measure how likely uncertainty about a variable or set of variables is to influence outcomes Exploration of alternative futures that are comprised of many uncertainties considered simultaneously resulting in a baseline strategy that is successful under many scenarios. Typical Usage Assessment of impact of sudden market changes or disruptions To test profitability of an investment if one variable were to change. whether a capital Decision under uncertainty modeling is an effective tool in geological assessment Formulate business strategy to deal with various climate-related scenarios Source: "a framework for 2 degrees scenario analysis - Ceres." Accessed 13 May Source: "Dark Clouds or Silver Linings? Knightian Uncertainty... - SSRN papers." 21 Jul. 2011, Accessed 14 May

5 Types of Risks Climate Change Poses to Businesses There are many publicly-available scenarios that can be used by organizations as a platform on which to base their own evaluations of the impacts posed by climate change. These can be broadly assigned into two categories Transition Scenarios that articulate different pathways in the energy and economy system that would result in a certain level or trajectory of GHG emissions and resulting GHG concentrations in the atmosphere Physical Scenarios that articulate different pathways that account for physical changes arising from different levels of GHG concentrations Publicly-Available Scenarios 3.6 C: IEA New Policies Scenarios 2 C: IEA 2DS/450 Scenarios, DDPP, IRENA, Greenpeace 1.5 C: Forthcoming IEA 1.5DS scenario 6 C: IPCC RCP C: IPCC RCP C: IPCC RCP C: IPCC RCP Source: "CDP Technical Note on Scenario Analysis - Rackcdn.com." _docs/pdfs/000/001/430/original/cdp-technicalnote-scenario-analysis.pdf? Accessed 14 May

6 Categories of Climate-Related Risks & Opportunities The business impacts related to climate change may vary significantly depending on the industry and economic sector(s)/sub-sector(s) in which an organization operates. Below are typical categories of climate-related risks and opportunities: MARKETS AND TECHNOLOGY SHIFTS Policies and investments to deliver a low carbon emissions economy - Reduced market demand for higher carbon products - Increased demand for energy-efficient, lower-carbon products - New technologies disrupt markets REPUTATION Growing expectations for responsible conduct from stakeholders, including investors, lenders, and consumers - Opportunity to enhance reputation and brand value - Loss of trust and confidence in management POLICY AND LEGAL An evolving patchwork or requirements at international, national, and state level - Increased input/operating costs for high carbon activities - Threats to securing license to operate for high carbon activities - Emerging concern about liabilities PHYSICAL RISKS Chronic changes and more frequent and severe extremes of climate - Increased business interruption and damage across operations and supply chains with consequences for input costs, revenues, asset values, and insurance claims 6 Source: CDP, Climate Change Questionnaire 2016; Recommendations of the Task Force on Climate-related Financial Disclosures, December 2016

7 Case Study: Unilever Unilever has integrated climate-related disclosures throughout the strategic report narrative and included risks and opportunities arising from climate change. The company has performed a high-level assessment of the impact of 2 C and 4 C global warming scenarios on its business. SCENARIOS ASSUMPTIONS ANALYZED IMPACTS 2 C scenario Assumed that in the period to 2030 society acts rapidly to limit greenhouse gas emissions and puts in place measures to restrain deforestation and discourage emissions (for example implementing carbon pricing at $75- $100 per tonne, taken from the International Energy Agency s 450 scenario) Assumed that there will be no significant impact to their business from the physical ramifications of climate change by 2030 ie. from greater scarcity of water or increased impact of severe weather events The scenario assesses the impact on Unilever s business from regulatory changes 4 C scenario Assumed climate policy is less ambitious and emissions remain high so the physical manifestations of climate change are increasingly apparent by 2030 Did not include impacts from regulatory restrictions but focused on those resulting from the physical impacts. Carbon pricing is introduced in key countries and hence there are increases in both manufacturing costs and the costs of raw materials such as dairy ingredients and the metals used in packaging Zero net deforestation requirements are introduced and a shift to sustainable agriculture puts pressure on agricultural production, raising the price of certain raw materials Chronic and acute water stress reduces agricultural productivity in some regions, raising prices of raw materials Increased frequency of extreme weather (storms and floods) causes increased incidence of disruption to Unilever s manufacturing and distribution networks Temperature increase and extreme weather events reduce economic activity, GDP growth and hence sales levels fall The analysis shows that, without action, both scenarios present financial risks to Unilever by 2030, predominantly due to increased costs. 7 Source "Annual Report and Accounts 2017 (PDF 3MB) - Unilever." 1 Jan. 2018, unilever-annual-report-and-accounts-2017_tcm _en.pdf. Accessed 14 May

8 Preliminary Interview Insights From our conversations with executives at Colgate-Palmolive, it is clear climate change is an emerging risk and steps are required to actively consider and monitor its potential impact Energy infrastructure reliability: Extreme weather (including heat waves) will likely impact energy infrastructure, including generators and transmission and distribution lines. This will affect energy reliability Energy cost: The cost of refrigeration, heating, ventilation and air conditioning is expected to increase each year due to an increased number of unseasonably hot days. Transportation cost: More sever and frequent extreme weather events might cause disruption on the logistic and distribution lines, due to damage on roads and buildings, potentially increasing the amount of time that is needed to reach products to the end-users. 8

9 Preliminary Interview Insights Infrastructure damage: Extreme weather events could damage our physical assets such as warehouses, as well as transport infrastructure Commodity prices: Commodity prices which are required ingredients for Colgate- Palmolive products may rise Regulatory risk: Significant shift in governments attitudes to emissions regulation, setting ambitious targets and encouraging more global consistency in approach trend is expected to continue which could have impact to Colgate-Palmolive s business Reputational risk: In the context of more frequent severe weather events and shifting global attitudes, customers may have changing expectations of companies, including their operational efficiency, environmental transparency in their supply chain and product range Competitive risks: Emerging business models that take advantage of climate change opportunities or are more resilient to climate change risks may become a threat 9

10 Scenario Analysis Process Define scope and Stakeholders Identify trends and uncertainties Construct themes and initial scenarios Identify research needs and develop quantitative models Evolve towards decision scenarios 10

11 Scope and Stakeholders Time Horizon: years Geography: Global Stakeholders Consumers Shareholders Employees Customers Environment Suppliers Government NGOs Buying behavior, sustainability awareness Investment choices, sustainability awareness Sustainability awareness, future talent pool Sustainability initiatives, qualification requirements GHG emissions, materials, water, energy Responsible suppliers Regulations, taxes Sustainability reporting, rankings Colgate-Palmolive s strategy time horizon is years. For sake of compatibility, time horizon for scenario analysis was chosen to be the same. Interviews with Colgate-Palmolive employees revealed that stakeholders of diverse nature are important to Colgate-Palmolive. Awareness of this list helped customize trends and uncertainties at later stages. 11

12 Past Industry Trends PT1 PT2 PT3 PT4 PT5 PT6 PT7 PT9 PT10 PT11 Innovation in the industry has consistently increased SKUs. Emerging markets have provided growth opportunities. Globalization has expanded sourcing and manufacturing opportunities ecommerce companies have gained significant market penetration. Sustainability regulations have been become more stringent. There is an increase in sustainability pressure from consumers and investors Data analytics is enabling higher efficiency Responsible sourcing concerns have changed the old model of long-term sourcing contracts resulting in price volatility. Stronger hurricanes in the gulf have prompted many suppliers from Mexico to claim Force Majeure. El Nino and La Nina impact supply of palm oil. In this stage some key trends that have impacted Colgate Palmolive s business in past were looked at. Dependencies on business environment and climate change were looked at in tandem (in the long-term view, both types of dependencies are interlinked). Knowledge of these trends was necessary to extrapolate known trends to the selected time horizon. 12

13 Future Trends: 2 C Scenario U1 U2 U3 U4 U5 U6 Will emerging markets impose carbon taxes? How quickly will the cost of green technologies be reduced? How will increased biofuel production impact tallow prices? Will the cost of responsible sourcing increase or decrease? How deforestation and sustainable production requirements impact raw materials prices? How much cost will CP be able to reduce due to conservation and recycling efforts? These scenarios should be used to check the validity of these assumptions in relation to other uncertainties in the scenario. Such analysis will help formulate one scenario that makes realistic assumptions on each uncertainty that are valid for the whole scenario. 13

14 Recommendations Scenario Analysis carries value beyond maintaining sustainability ratings. Scenario Analysis forces corporations to take a long-term view of the business and hence brings long-term business continuity into limelight that may be endangered by the pervasive short-termism. 14